Kinder Morgan: A Promising Pipeline Play

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Market Profile

Through its general and limited partner interests, Kinder Morgan has leveraged the resources of Knight to enable it to evolve into a leader in several core business segments, in our opinion. It is the largest independent U.S. owner and operator of pipelines transporting refined products as well as the largest independent operator of terminals. Its pipelines transport more than 2 million barrels per day of gasoline and other petroleum products and up to 7 billion cubic feet per day of natural gas. Kinder Morgan's terminals handle more than 90 million tons of coal and other dry bulk materials and have liquids storage capacity of about 70 million barrels for petroleum products and chemicals. In addition, Kinder Morgan is a leading provider of carbon dioxide used for enhanced oil recovery projects in the U.S.

We believe Kinder Morgan's size and financial resources have enabled it to distinguish itself from most other MLPs through a balanced program of acquisitions and internal expansion projects. During 2007, the partnership spent $1.7 billion for additions to property, plant, and equipment, including expansion and maintenance projects. Kinder Morgan's total capital expansion program in 2007 was about $2.6 billion, and including acquisitions totaled $3.3 billion.

New Pipelines

Since 2005, KMP has laid the groundwork for three new capital projects—the Rockies Express Pipeline, the Louisiana Pipeline, and the Midcontinent Express—that offer significant long-term growth potential, in our view. In total, we believe that Kinder Morgan's $3.3 billion share of investments in these three projects will add at least 15¢ to 20¢ per unit in distributable cash flow by 2010.

In August, 2005, KMP announced a 66.7%/33.3% joint venture with Sempra Energy (SRE) to pursue the development of a new natural gas pipeline called the Rockies Express Pipeline (REX), providing needed take-away capacity from producing areas in the Rocky Mountains. The planned 1,675-mile pipeline would originate in Wyoming and extend to eastern Ohio at an estimated total construction cost of $4.4 billion. The February, 2006, acquisition of Entrega Gas Pipeline added two connecting pipelines in Colorado and Wyoming. In February, 2006, binding commitments were secured from shippers for all of the 1.8 billion cubic feet per day of capacity. In June, 2006, Conoco­Phillips (COP) joined the joint venture with a 24% share, reducing Kinder Morgan's and Sempra Energy's shares to 51% and 25%, respectively. The first segment of the project, REX-West, was placed into service in January, 2008, and construction is scheduled to begin in June, 2008, on REX-East, with completion anticipated by yearend. The entire REX project is expected to be fully operational by June, 2009, subject to regulatory approvals. After completion, it will be one of the largest natural gas pipelines in North America.

In September, 2006, Kinder Morgan requested government approval for its proposed Louisiana Pipeline, expected to provide 3.2 billion cubic feet per day of natural gas take-away capacity from the new Cheniere Sabine Pass LNG terminal in Cameron Parish, La. At an estimated cost of $514 million, the pipeline would provide access to new supplies of imported LNG. The pipeline's capacity is fully subscribed with long-term commitments from Chevron (CVX) and Total (TOT). Construction is under way and is expected to be completed in 2009.

The Midcontinent Express Pipeline is expected to be in service by March, 2009, subject to regulatory approvals. The $1.3 billion project will extend from southeastern Oklahoma, across northeastern Texas, northern Louisiana, and central Mississippi to an interconnection with the Transco Pipeline near Butler, Ala. Midcontinent Express has put in place a $1.4 billion, three-year bank facility to be utilized for construction of the project.